Mining Company Leverage

This week I decided to look over some of our earlier reports and provide some
information that can help to clarify some common misperceptions in valuing
mining companies. The following is edited down considerably from a November
2007 Morgan Report.

One of the best ways to gain leverage to the precious metals is still in the
mining sector and specifically through both junior and senior mining stocks.
One analytical method is to take the total resource (indicated and inferred)
and determine how many ounces you as an investor are receiving per share or
per dollar invested.

This methodology is one that is used by other analysts and before beginning
our discussion I must state that as a young investor in the mining industry
the first time I discovered such an analysis it seemed to be just what I was
looking for because it seemed that buying the most silver or gold per dollar
was certainly value investing and this gave me a sense of expectations that
the market ignored.

Long term readers may recall that ***(named left out intentionally) uses
this type of approach among others and quite frankly it is a tool and a useful
one at that but please do not get carried away that this is the best way to
examine any given mining prospect. For an example a consistent top pick by
us would come out very poorly in this model yet this pick of ours is and has
been one of the leading stocks in the sector and in our view will continue
to be a leader all the way up. The main point is that all projects should be
examined on an individual basis and comparisons must be made carefully.

Note: We had provided a matrix of companies mostly in the silver sector for
our readers.

First our work contains both silver explorers and silver producers and thus
they cannot really be compared exactly. Notice that the producers sell at a
much higher market capitalization per ounce than the explorers. There are several
reasons for this, first a mine has great capital expenditure involved in the
roads, buildings, machinery, housing, power and water systems. Additionally,
in most cases the exploration costs were higher because the project had to
be taken to feasibility and the mine put into production.

This brings us to another important factor, are we looking at an open pit
situation or are we looking at an underground mine? An open pit mine can be
easier to put into production and far less capital intensive than an underground
mine. That is why a company like Western Silver can show rather "skinny" average
grades and still be economic. For an underground mine to be economic it must
have much higher grades for the project to be worthwhile. So one question an
investor should always ask is what type of deposit are we looking at in any
given situation.

Another factor that I have seldom seen discussed is rate of production. Specifically,
in an underground mine how many ounces are pulled up out of the shaft in a
24 hour period? This is important because some companies like to brag about
huge resources and yet the mineshaft only allows a certain quantity of ore
to come to surface. Now having a large resource is important but if you have
a tremendous quantity of silver underground but can only bring an extremely
small amount of it to surface your income statement will reflect that fact
and your stock price may stall out leaving investors that do not understand
the dynamics of mining confused.

Obviously such a miner could sink another shaft or find other means of mining
greater quantities of ore, but this is a large capital cost and in some cases
may require that the original operation be put on hold. This could really upset
the market and the stock price could suffer although those savvy investors
would recognize the opportunity. But this would only be after carefully examining
the numbers to see that the additional expense was going to produce a significant
internal rate of return. In other words, would the owners of the company (shareholders)
benefit?

We have just scratched the surface of some preliminary thinking that goes
into a mining company analysis. I will be speaking at the Money Show in Las
Vegas this week and am completing this missive on Mother's Day. With
that in mind, I wish all Mom's everywhere a fantastic week, and the best
to our readers always.

David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious
metals industry; he consults for hedge funds, high net-worth investors, mining
companies, depositories and bullion dealers. He is the publisher of The
Morgan Report on precious metals, the author of Get the Skinny on Silver
Investing, and a featured speaker at investment conferences in North America,
Europe and Asia. You can receive a free 30 day trial subscription here http://www.silver-investor.com/joinfreelist.html

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The
Gold Newsletter, Resource Consultants, Resource World, Investment Rarities,
The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does
weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial
Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding
Ten Rules of Silver Investing, which you can receive for free. His book Get
the Skinny on Silver Investing is available on Amazon or the link
provided.

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reliable, but there is no guarantee as to completeness or accuracy. Because
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